agricultural trade liberalization and poverty in rural bangladesh

Agricultural Trade Liberalization and Poverty in

Rural Bangladesh

Dayal TalukderICL Business School, Auckland, New Zealand

This study investigated the changes in poverty of rural households in Bangladesh in the post-

liberalization era. The study used household survey data from secondary sources and calculated

poverty indices, decomposition, and elasticity. The study found that income distribution across rural

households was uneven in the post-liberalization period. Although agricultural trade liberalization

generated significant growth, inequality also increased and the rich gained more from this growth

than the poor. Therefore, poverty reduction in the post-liberalization period was not as significant as

the economic growth. Among rural households, non-farm households gained more than farm

households from post-liberalization growth because of a relatively large reduction in consumer price

compared to increases in productivity of rice. Similarly, net buyers gained more than net sellers

from a large reduction in rice price. The study suggests that holding inequality constant at the

1985–1986 level, rural poverty in Bangladesh could be reduced to zero with the growth experienced

during 1985–1986 to 2005. The study argues that a reduction in poverty at a substantial level is a

big challenge for policymakers because of an increase in inequality along with economic growth.

Therefore, the government should formulate policies to reduce inequality in order to reduce poverty

significantly.

KEY WORDS: agricultural trade liberalization, inequality, poverty, Bangladesh

Introduction

Bangladesh is an agricultural country. More than 80 percent of its population

depend directly or indirectly on agriculture for their livelihoods. This segment of

the population is also predominantly made up of rural households. The

agricultural sector contributes around 20 percent to gross domestic product

(GDP) and employs more than 60 percent of the total labor force of the economy.

Bangladesh went through a series of deregulation and agricultural trade

liberalization measures in the late 1980s and early 1990s. The reform measures—

including liberalization of the input markets for fertilizers, pesticides, and

irrigation equipment and adoption of high-yielding variety seeds for rice

production—led to major structural reforms and technological transformation,

resulting in a significant increase in productivity and growth in the agricultural

Poverty & Public Policy, Vol. 6, No. 3, 2014

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Published by Wiley Periodicals, Inc., 350 Main Street, Malden, MA 02148, USA, and 9600 Garsington Road, Oxford, OX42 DQ.

sector. The economy experienced significant productivity growth in agriculture

over the last two decades (1990–2010). The technological transformation in

agriculture enabled the country to achieve self-sufficiency in food-grain produc-

tion in the early 1990s (Ahmed & Sattar, 2004, p. 19; Islam & Habib, 2007, p. 4;

Klytchnikova & Diop, 2006, p. 3). The rising volume of rice production was

accompanied by a decline in rice prices during 1990–2010. Moreover, because of

significant structural transformation and technological changes, the productivity

of this sector was at its highest level (Bangladesh Bureau of Statistics [BBS], 2009,

p. 3; Klytchnikova & Diop, 2006, p. 2; Ministry of Finance, 2010, p. 84). These

structural transformations reflected the government’s efforts to open the econo-

my, liberalize agricultural trade, and reform domestic markets in the 1980s and

1990s (Ahmed & Sattar, 2004, p. 12; Klytchnikova & Diop, 2006, p. 2). They

enabled the economy to achieve significant growth in the 1990s: an increase in

real GDP by an average of 4.2 percent per year and significant increases in

agricultural production (Klytchnikova & Diop, 2006, p. 2; Salim & Hossain, 2006,

p. 2570).

Despite this impressive growth performance, the rate of decline in the

incidence of poverty over the two decades 1985–2005 was rather insignificant.

Poverty declined an average of less than 1 percent over the 20-year period,

leaving poverty at a remarkably high level: more than 40 percent of the country’s

population, and the majority from rural areas (Ahmed & Sattar, 2004, p. 18;

BBS, 2007, p. 57; Klytchnikova & Diop, 2006, p. 2; Ministry of Finance, 2010,

p. 177). Thus, a significant question arises—to what extent has agricultural trade

liberalization influenced the welfare (poverty reduction) of rural households in

Bangladesh? Given the significant impact of agricultural trade liberalization

policy-exercise on more than 80 percent of the country’s population (dependent

on agriculture and predominantly rural households), there is a strong justification

for a study into its consequences and implications.

Therefore, the focus of this study was to investigate the impact of agricultural

trade liberalization on the welfare of rural households through changes in poverty

in the post-liberalization era. Although other factors might also have affected

poverty due to changes in the growth of real income, agricultural trade

liberalization was the most important policy reform because of rural households’

crucial dependence on agriculture in terms of both income and consumption.

The following sections include agricultural trade liberalization scenarios in

Bangladesh, a literature review, a methodology and research design, a discussion

and analysis of the results, and a conclusion.

Agricultural Trade Liberalization Scenarios in Bangladesh

Like many other developing countries in the world, Bangladesh had pursued

inward-looking policies and strategies for trade and development since its

independence in 1971. These policies involved high government interventions in

almost all economic activities, including agriculture (Ahmed, Bakht, Dorosh, &

Shahabuddin, 2007, pp. 2, 7; Draper & Sally, 2005, p. 3; Hoque & Yusop, 2010,

Talukder: Poverty in Bangladesh 283

p. 1; Rahman, 2008, p. 5). Bangladesh encouraged cooperative farming with a

view to developing a socialist system of agriculture during the 1970s. The

government controlled the procurement and distribution of seeds, fertilizers,

pesticides, and all other agricultural inputs and equipment (Ahmed & Sattar,

2004, p. 11; Ahmed et al., 2007, pp. 2, 7; Salim & Hossain, 2006, p. 2568).

The government adopted import substitution policies with restrictions on

imports in order to protect and support domestic production. It controlled the

foreign trade and exchange rate system for making interventions effective

(Ahmed & Sattar, 2004, p. 11; Krueger, 2010, p. 2; Nahar & Siriwardana, 2009,

p. 327; Salim & Hossain, 2006, p. 2568). A series of measures including

quantitative restrictions, highly differentiated tariff rates (ranging from 0 to 400

percent), huge production subsidies, and overvalued exchange rates was put in

place to protect domestic production from world competition (Ahmed & Sattar,

2004, p. 11; Ahmed et al., 2007, p. 7; Nahar & Siriwardana, 2009, p. 327; Salim &

Hossain, 2006, p. 2568).

The government reinforced this protective environment with domestic market

policy interventions in the form of credit ceilings, price controls, and arbitrary

licensing such as import licenses. These licenses were granted only when there

was no domestic source available (Ahmed et al., 2007, p. 19; Islam & Habib, 2007,

pp. 10, 14; Krueger, 2010, p. 2; Salim & Hossain, 2006, p. 2568). Moreover,

traditionally, the Bangladesh Agricultural Development Corporation (BADC) had

the sole authority and responsibility for procuring and distributing agricultural

inputs, including fertilizers, irrigation equipment, pesticides, and seeds (Ahmed

et al., 2007, pp. 19, 21; Islam & Habib, 2007, pp. 10, 14; Rahman, 2008, p. 13; Salim

& Hossain, 2006, p. 2568).

However, these inward-oriented trade policies were not successful in terms of

trade expansion or import substitution. These policies did not result in a

sustained increase in production and efficiency. Rather, the gap between demand

for and supply of agricultural goods widened over the years (Ahmed et al., 2007,

p. 7; Hoque & Yusop, 2010, p. 39; Salim & Hossain, 2006, p. 2568). With a growing

dissatisfaction regarding inward-looking trade and development policies, many

questioned the sustainability of government interventions toward long-term food-

grain availability due to the increased inefficiency and corruption in the public

management system and the heavy budgetary burden imposed by these

operations (Ahmed et al., 2007, pp. 6, 7; Dorosh & Shahabuddin, 2002, p. 38;

Hoque & Yusop, 2010, p. 39; Krueger, 2010, p. 5; Salim & Hossain, 2006, p. 2569).

Realizing such inefficiencies as well as constant pressures from the donor

countries and international development agencies such as the World Bank and

the IMF, the government started to pursue a policy shift from state intervention

to more market-oriented policies in the mid-1980s, with a view to achieving high

economic growth and reducing poverty (Ahmed et al., 2007, p. 9; Hoque &

Yusop, 2010, p. 39; Hossain & Verbeke, 2010, p. 78; Islam & Habib, 2007, p. 3;

Nahar & Siriwardana, 2009, p. 327; Rahman, 2008, p. 11; Salim & Hossain, 2006,

pp. 2567, 2569). Deregulation and agricultural trade liberalization generated a

momentum that began in the late 1980s and peaked in the early 1990s. Major

284 Poverty & Public Policy, 6:3

reforms in agricultural policy included liberalization of input markets, shrinking

the role of government agencies in the distribution of inputs, substantial

reduction and rationalization of tariffs, removal of quantitative restrictions,

moving from multiple to a unified exchange rate, and moving from a fixed to a

flexible exchange rate system (Ahmed & Sattar, 2004, pp. 11, 12; Ahmed et al.,

2007, p. 9; Hoque & Yusop, 2010, p. 39; Hossain & Verbeke, 2010, p. 78; Islam &

Habib, 2007, p. 4; Salim & Hossain, 2006, p. 2569).

Similarly, the government pursued a wide range of policy reforms to

liberalize agricultural input markets, including privatizing the distribution system

of key agricultural inputs, initiatives for deregulation measures to improve the

investment climate for private enterprises, gradually eliminating subsidies on

fertilizers and small irrigation equipment, and encouraging the private sector to

participate in the maintenance of agricultural equipment (Ahmed, 2004, pp. 11,

12; Ahmed et al., 2007, p. 9; Klytchnikova & Diop, 2006, p. 3; Salim & Hossain,

2006, p. 2569).

As a consequence of these reforms, the fertilizer trade was almost entirely

handled by the private sector in 2005 (Ahmed et al., 2007, pp. 19, 20; Ahmed &

Sattar, 2004, pp. 13, 19; Klytchnikova & Diop, 2006, p. 3; Salim & Hossain, 2006,

p. 2569). Further policy reforms included rationalizing or eliminating import

duties on agricultural inputs and spare parts, eliminating the government

monopoly in fertilizer imports, and abolishing standardization requirements

(Ahmed et al., 2007, pp. 19, 20; Ahmed & Sattar, 2004, pp. 13, 19; Klytchnikova &

Diop, 2006, p. 3; Salim & Hossain, 2006, p. 2569).

There were encouraging responses to these liberalization and reform

initiatives from market forces. Therefore, private sector participation in the input

market rose sharply. Irrigation equipment became cheaper, and farmers had easy

access to the equipment. Different types of high-yielding variety (HYV) seeds

were available to farmers, thereby promoting both extensive and intensive

cultivation by increasing the irrigated area and use of fertilizers (Klytchnikova &

Diop, 2006, p. 3; Salim & Hossain, 2006, p. 2569).

Consequently, agricultural trade liberalization generated significant impacts

on economic growth through productivity improvement in the agricultural sector.

It contributed to technological innovation in agriculture, leading to productivity

improvement of agricultural inputs (Ahmed & Sattar, 2004, p. 19; Islam & Habib,

2007, p. 4; Klytchnikova & Diop, 2006, p. 3).

Literature Review

The advocacy for free trade was based not only on the Ricardian principle of

comparative advantage but also on the argument that free trade would contribute

to development through competition and learning (Chang, Kaltani, & Loayza,

2005, p. 2; Garcıa-Vega, Guariglia, & Spaliara, 2011, p. 58; McCulloch, Winters, &

Cirera, 2003, pp. 15, 16; Montalbano, 2011, p. 1; Zhang, 2008, p. 175). Trade

liberalization promotes the efficient allocation of resources through comparative

advantage, allows the dissemination of knowledge and technological progress,


and encourages competition in domestic and international markets (Chang et al.,

2005, p. 2; McCulloch et al., 2003, pp. 15, 16; Montalbano, 2011, p. 1; Stiglitz, 2003,

p. 59; Stone & Shepherd, 2011, p. 5; Zhang, 2008, p. 175). This is because trade

liberalization is meant to work by getting relative prices “right,” which should

lead to the reallocation of resources from import substitutions to export sectors

(Foster, 2008, p. 544; Krueger, 2010, p. 5; McCulloch et al., 2003, p. 16; Zhang,

2008, p. 175).

The theoretical models, as illustrated in endogenous growth models by Young

(1991), Grossman and Helpman (1991), Lee (1993), Eicher (1999), and Eaton and

Kortum (2002), explained that there were long-run positive growth effects when

the areas of specialization promoted by trade enjoyed increasing return to scale.

According to these models, liberalization could raise growth by facilitating the

import of capital and intermediate goods not available domestically, resulting in

an increase in the productivity of domestic manufacturing and agricultural

sectors, in turn leading to higher economic growth (Foster, 2008, p. 545; Henry,

Kneller, & Milner, 2009, p. 237; McCulloch et al., 2003, p. 25; San & Portes, 2009,

pp. 944, 945). Furthermore, liberalization allows improved access to the new ideas

and technologies embodied in foreign products. Such access can, in principle,

enhance a country’s technological capability and assist in productivity improve-

ment (Foster, 2008, p. 545; Henry et al., 2009, p. 237; McCulloch et al., 2003, p. 25).

The proponents of openness argue that trade liberalization has positive

impacts on economic growth, which ultimately helps poverty reduction. They

argue that if initial inequality is low and growth does not worsen income

distribution, the proportion of the population living in poverty will fall as the

average income increases (Achterbosch & Roza, 2007, p. 45; Kirkpatrick &

Scrieciu, 2006, p. 2; McCulloch et al., 2003, p. 21; Naranpanawa, Bandara, &

Selvanathan, 2011, pp. 328, 329; Susila & Bourgeois, 2008, p. 72). Moreover, if

income grows, it will be easier for governments to raise and reallocate resources

to support poverty reduction policies and programs.

Critics argue that if market or institutional imperfections exist, openness can

lead to sub-utilization of human and capital resources, concentration on extractive

economic activities, or specialization away from technologically advanced increas-

ing return sectors (Chang et al., 2005, p. 2; Chang, Kaltani, & Loayza, 2009, p. 1;

Krugman & Obstfeld, 2006, pp. 405, 406; Panagariya, 2004, p. 1150). Grossman

and Helpman (1991) and Matsuyama (1992) provided theoretical models where a

technologically backward country specializes in a non-dynamic sector as a result

of openness, thus losing out on the benefits of increasing returns. Underlying

these models is an imperfection in contracts or in financial markets that causes

people to observe a myopic notion of comparative advantage (Chang et al., 2005,

p. 2; Panagariya, 2004, pp. 1149, 1150; Stiglitz & Charlton, 2007, pp. 25, 89). Sachs

and Warner (1999) developed a model where specialization in the extractive

economic activities of the natural-resource sector prevents a country from

technological progress that eventually leads to long-run growth. In this case, the

underlying imperfection is an institutional weakness that encourages natural-

resource depletion for quick gains, leading to serious distortions in income


distribution and welfare changes against the weak (poor) groups of the economy

(Chang et al., 2005, p. 2; Krugman & Obstfeld, 2006, p. 405; Panagariya, 2004,

p. 1150; Stiglitz & Charlton, 2007, p. 37). Rodriguez and Rodrik (1999) reviewed

the theoretical arguments as to why openness could be detrimental to developing

countries. They argued it in the context of theory of the second best, in which

trade liberalization is the policy lever for such quick gains appropriated by

certain influential groups in society while market imperfections and institutional

weaknesses are accepted as imminent characteristics of the economy. Krugman

and Obstfeld (2006) argued that if there was imperfection in domestic markets, a

government intervention that appeared to distort incentives in one market might

increase welfare by offsetting the consequences of market failures in other

markets.

The effects of trade on income distribution, inequality, and poverty reduction

have been a subject of intense discussion in the literature. The most well-known

analytical frameworks were based on the Stolper-Samuelson Theorem, the work

of Wolfgang Stolper and Paul Samuelson (1941). Working in the context of the

Hecksher–Ohlin model with two factor inputs (labor and capital) and two goods,

the theorem demonstrates that a move from a situation of no trade to free trade

will reduce the return of relatively scarce factors because of specialization in favor

of abundant factors (Ahmed & Sattar, 2004, p. 4; Eicher, Mutti, & Turnovsky,

2009, pp. 82, 83; Falvey, Greenaway, & Silva, 2010, p. 230; Stolper & Samuelson,

1941, p. 59). Tariffs, for example, raise the price of the good employing abundant

factor intensively and will tend to benefit the relatively scarce factor. In most

cases in developing countries, labor appears to be the abundant factor and capital

the scarce factor. So under the framework of the Heckscher–Ohlin model of trade

in developing countries, tariffs would likely benefit capital at the expense of labor

(Ahmed & Sattar, 2004, p. 4; Falvey et al., 2010, p. 230; Stiglitz, 2003, pp. 59, 60).

There are arguments that agricultural trade liberalization contributes to

technological transformation and improves productivity of agricultural inputs,

allowing competition and efficient factor allocation that leads to higher economic

growth (Henry et al., 2009, p. 237; McCulloch et al., 2003, p. 25; San & Portes,

2009, pp. 944, 945; Stiglitz, 2003, p. 59; Stone & Shepherd, 2011, p. 5). Trade

liberalization facilitates technological transformations in the agricultural sector

with improved access to imported inputs, machinery, and knowledge, leading

to an increase in productivity (Foster, 2008, p. 545; Henry et al., 2009, p. 237;

Lipton, 2006, p. 60; McCulloch et al., 2003, p. 25; Meijerink & Roza, 2007, p. 10).

These arguments further suggest that the agricultural input market becomes

more competitive through diffusion of modern production technology and

knowledge in agriculture as a result of agricultural trade policy reforms.

Improved technology contributes to agricultural growth and welfare of the rural

economy (Foster, 2008, p. 545; Henry et al., 2009, p. 237; Lipton, 2006, p. 60;

McCulloch et al., 2003, p. 25; Thirtle et al., 2001, p. 4). This suggests that

technological progress, particularly in irrigation, fertilizer, pesticides, and hybrid

seeds, can enhance significant growth in agriculture and contribute to poverty

alleviation.


Agricultural growth in developing countries has received considerable

attention as a vehicle for poverty reduction. The dominant paradigm shift of

structural transformation since the 1980s has seen agriculture as an “engine of

growth” in countries in the early stages of development. This is particularly

because of agriculture’s high share of economic activity and strong growth

linkages with the rest of the economy (Byerlee, Diao, & Jackson, 2005, p. 1;

Mosley & Chiripanhura, 2009, p. 750; Novielli, 2010, p. 1; Thirtle et al., 2001, p. 11;

World Bank, 2008, p. 44). In this paradigm, agricultural growth is perceived as

the prime factor to enhance the welfare of rural households in developing

countries because the sector is dominated by small-scale rural farm households

(Byerlee et al., 2005, p. 1; Popli, 2010, p. 803; Thirtle et al., 2001, p. 11; Valenzuela,

Ivanic, Ludena, & Hertel, 2005, p. 1). Furthermore, agricultural productivity

growth has extensive multiplier effects on both farm and non-farm sectors

(Byerlee et al., 2005, p. 1; Popli, 2010, p. 803; Thirtle et al., 2001, p. 11; Valenzuela

et al., 2005, p. 1).

The poverty reduction and welfare enhancement effects of the agriculture-

driven growth paradigm are predicated on arguments that the adoption of

technological innovations in agriculture has a direct impact on increased

productivity and an indirect impact on the price of food for net buyers and labor

effects by generating employment in both the farm and non-farm sectors and

income through higher wages (Byerlee et al., 2005, p. 1; Meijerink & Roza, 2007,

p. 14; Mosley & Chiripanhura, 2009, p. 751; Popli, 2010, p. 803; Thirtle et al., 2001,

p. 11; Valenzuela et al., 2005, p. 1). These growth linkage effects might be

powerful when agricultural growth is driven by broad-based productivity

increases in a rural economy dominated by small and medium-sized farm

households. Because of these strong growth linkage effects, agricultural growth

can lead to wider economic growth through technological innovation (Adeoti &

Sinh, 2009, p. 6; Byerlee et al., 2005, p. 4; Meijerink & Roza, 2007, p. 10; Popli,

2010, p. 803; Thirtle et al., 2001, pp. 8, 9; Williams & Smith, 2008, p. 8).

However, the distributional impact of this growth can be mixed despite the

extensive spread of technological transformation in agriculture. Even where

agriculture retains comparative advantage, the liberalization of trade raises

questions about the pro-poor effects of agricultural productivity improvement

due to issues related to income distribution (Acharya, 2011, p. 61; Acharya &

Cohen, 2008, p. 1057; Gabre-Madhin, Barrett, & Dorosh, 2002, p. 1; Gerard &

Piketty, 2007, p. 2; Keleman, 2010, p. 13; Rakotoarisoa, 2011, p. 147). Therefore,

the effect of agricultural trade liberalization on welfare is highly contested in the

development economics literature (Cassel & Patel, 2003, p. 6; Keleman, 2010,

p. 13; Rakotoarisoa, 2011, p. 147; Sexton, Sheldon, McCorriston, & Wang, 2007,

p. 253).

The impact of agricultural trade liberalization on the welfare of rural

households depends on not only how income is distributed to them but also what

happens to average living standards of the rural livelihoods. Even the same level

of productivity growth may result in various levels of poverty reduction in

different countries depending on their respective policies and income distribution


(Chang et al., 2009, p. 2; Duncan & Quang, 2003, p. 14; Ravallion, 2004, p. 12;

Winters, McCulloch, & McKay, 2004, pp. 107, 108). Ravallion (2004) argued that it

should point to implications for policies that would be needed for rapid poverty

reduction, in addition to promoting higher growth. He suggested that two sets of

factors could be identified as the main proximate causes of the differing rates of

poverty reduction at given rates of growth—the initial level of inequality, and

how inequality changes over time. The higher the initial inequality in a country,

the less is gained from growth that tends to be shared (Orden, 2006, p. 379;

Ravallion, 2004, p. 12; San & Portes, 2009, p. 946; Susila & Bourgeois, 2008,

pp. 72, 76).

Agricultural growth may reduce poverty through direct effects on farm

productivity, incomes, and employment. It may also generate indirect impacts on

the welfare of rural households through the growth linkage with the non-farm

sector as well as through its impacts on food prices (Adeoti & Sinh, 2009, p. 6;

Bezemer & Headey, 2008, p. 1343; Byerlee et al., 2005, p. 4; Popli, 2010, p. 803;

Thirtle et al., 2001, p. 11; Valenzuela et al., 2005, p. 1). There have been arguments

that the poor typically spend a high share of their income on staple food;

therefore, they benefit from a decline in the price of staple food induced by

productivity improvement as a result of agricultural trade liberalization. Benefits

are greater for the urban poor and landless rural laborers since they are net food

purchasers (Adeoti & Sinh, 2009, p. 6; Bezemer & Headey, 2008, p. 1343; Byerlee

et al., 2005, p. 5).

Although agricultural trade liberalization may improve productivity through

technological innovation, this growth may not be pro-poor (Meijerink & Roza,

2007, p. 11; Popli, 2010, pp. 803, 811; 2003, p. 15; 2009, pp. 28, 29). However, some

studies, such as Byerlee et al. (2005), Winters et al. (2004), and Bezemer and

Headey (2008), argued that the interaction of productivity growth, farm income,

employment, and food prices could lead to a pro-poor outcome depending on

two key conditions. First, agricultural productivity per unit of labor must increase

to raise farm income, but agricultural productivity per unit of land must increase

at a faster rate than that of labor in order to raise employment and rural wages.

Second, increased productivity in agriculture must result in a decrease in real

food prices, but productivity must increase faster than food prices decrease for

farm profitability to rise and for poor consumers to benefit from lower food

prices.

Agricultural trade liberalization may not produce similar welfare impacts

across all rural households. In practice, some households might experience

benefits and others might experience losses, resulting in diverse distributional

consequences across rural households (Hossain & Verbeke, 2010, pp. 77, 78; Isik-

Dikmelik, 2006, p. 3; Klytchnikova & Diop, 2006, p. 4; World Bank, 2008, pp. 29,

53). Such diverse outcomes can be explained by the fact that agricultural trade

liberalization affects the prices of goods and factors. Thus, the changes in prices

of goods and factors may diversely affect the welfare of rural households due to

their various degrees of involvement with goods and factors markets such as

producers or consumers, farm or non-farm households, and net buyers or net


sellers (Hossain & Verbeke, 2010, pp. 77, 78; Isik-Dikmelik, 2006, p. 3; Klytchni-

kova & Diop, 2006, p. 4; World Bank, 2008, pp. 29, 53).

Hertel (2006), Popli (2010), and Gingrich and Garber (2010) found that the

impacts of agricultural trade liberalization on poverty and inequality would

depend on a number of important factors. First, the extent of price transmission

from the border to the local markets could vary widely even within a given

country, as was seen in the case of Mexico. Poor infrastructure and high

transaction costs insulate rural consumers from world price rises while penalizing

exporters. Thus, households would gain from price increases due to agricultural

trade liberalization if they were net suppliers. However, in the case of the poorest

households, their ability to increase production might be constrained by the lack

of key productive assets, thereby limiting their supply response. This limited

supply response can hinder the potential for such commodity price increases to

pull the poor households out of poverty in the absence of complementary policies

such as improved access to credit and advanced technology. Consequently, trade

liberalization resulted in adverse effects on poverty and income distribution in

Mexico (Hertel, 2006, p. 11; Nicita, 2009, p. 26; Nissanke & Thorbecke, 2007, pp. 2,

7; Popli, 2010, p. 811).

Based on conventional wisdom, Anderson (2004) argued that higher economic

growth would contribute to a greater reduction in poverty; aggregate economic

growth differences were largely responsible for the differences in poverty

alleviation across regions. He argued that initiatives to boost economic growth

were, therefore, likely to be helpful in poverty reduction. Agricultural trade

liberalization is such an initiative that tends to boost economic growth through

enhancing productivity of agricultural inputs. However, it may also alter relative

product prices, which in turn may affect factor prices (Anderson, 2004, p. 1;

Burstein & Vogel, 2011, p. 25; Topalova, 2010, p. 3; Xu, 2003, p. 417). Hence, the

net effect of agricultural trade liberalization on poverty reduction also depends

on the directions of those domestic product price changes and, in turn, how they

affect domestic factor prices. It is argued that if the price changes are pro-poor,

then they will tend to reinforce any positive-growth effects of agricultural trade

reform on the poor. Moreover, the outcome of this reform also depends on

complementary pro-poor domestic policies (Anderson, 2004, p. 2; Meijerink &

Roza, 2007, p. 12; Susila & Bourgeois, 2008, p. 75).

While trade liberalization has facilitated agricultural growth through diffu-

sion of modern technology and knowledge, the agro-pessimists argue that the

contribution of agriculture to development is passive. Conversely, agro-pragma-

tists argue that agriculture has a significant role in growth as well as in poverty

reduction. However, agricultural trade liberalization may worsen the conditions

of the poor in the form of higher prices due to the price of food in liberalized

markets being determined more by world prices than by domestic productivity.

This is because many governments of developing countries use control over

external trade to hold domestic food prices below world prices (Anderson,

Cockburn, & Martin, 2011, pp. 1, 2; Byerlee et al., 2005, p. 8; Huylenbroeck,

Vandermeulen, Mettepenningen, & Verspecht, 2007, p. 3; Keleman, 2010, pp. 13,


26). Similarly, technological transformation as a result of agricultural trade

liberalization is sometimes seen as a source of impoverishment in the form of loss

of employment leading to an increase in poverty because it is associated with a

process of creative destruction. In this process, jobs and livelihoods are destroyed

in some sectors while being created in others. Therefore, there may be some

gainers as well as some losers resulting from agricultural trade liberalization

(Banerjee & Newman, 2004, p. 16; Gore, 2007, p. 31; OECD, 2011, p. 12; Susila &

Bourgeois, 2008, pp. 74, 75).

Many studies attempted to shed light on the impact of agricultural trade

liberalization on the welfare (inequality and poverty reduction) of rural house-

holds in Bangladesh. Mujeri (2002) argued that while Bangladesh’s greater

integration into the world economy was generally “pro-poor,” the gains were

relatively small due to structural bottlenecks and other constraints. The World

Bank (2002) showed that the benefits of economic growth during the 1990s had

not been distributed evenly across the regions. The World Bank (2004) report

showed that Bangladesh experienced a significant improvement of the rural non-

farm sector in recent years. In another report, the World Bank (2006) argued that

trade liberalization made available cheap imports of agricultural inputs such as

pesticides, irrigation equipment, fertilizers, and seeds. The report claimed that the

application of these inputs affected the environment adversely in the form of loss

of soil fertility, loss of biodiversity, and water pollution. Salim and Hossain (2006)

noted wide variations in productive efficiency across farms as a result of

agricultural reforms. Average efficiency increased modestly from pre-reform to

the post-reform period. The efficiency differentials were largely explained by

farm size, infrastructure, households’ off-farm income, and the reduction of

government anti-agricultural bias in relation to trade and domestic policies.

Klytchnikova and Diop (2006) found that reform in the agricultural sector

contributed significant growth to the economy, but its impact on the reduction of

rural poverty was considered very insignificant. They argued that agricultural

trade liberalization improved the production of rice considerably, leading to a

significant decrease in rice price. They found that net buyers gained and net

sellers lost from this process. BBS (2009) found that during the last decade,

significant changes took place in the agricultural sector. These changes included

new production structures with a combination of irrigation, fertilizers, high-

yielding varieties of seeds and pesticides, and mechanization in land preparation.

All of these changes contributed to an increase in production of food grains in

Bangladesh. Nahar and Siriwardana (2009) conducted an ex ante analysis using a

computable general equilibrium (CGE) model and found that the complete

removal of import tariffs could reduce absolute poverty for all groups, both in

rural and urban areas. Hossain (2009) found that agricultural trade liberalization

contributed to the development of minor irrigation dominated by shallow tube-

wells, leading to the expansion of boro rice cultivation. Consequently, rice

production increased significantly. Hossain and Verbeke (2010) found that

agricultural trade liberalization contributed to the integration of rice markets

across the six regions (divisions), and therefore the long-run equilibrium was


stable. Conversely, in the short run, the market integration as measured by the

magnitude of market interdependence and the speed of price transmission

between the divisional markets was weak.

Alam et al. (2011) attempted to analyze the welfare impact of policy

interventions in food grain markets during 1980–2003. They argued that the loss

in consumer surplus exceeded the gain in producer surplus from government

control over food grain markets, resulting in a deadweight loss for the society.

Conversely, they further argued that the gain in consumer surplus and govern-

ment revenue from liberalization of food grain markets was greater than the loss

in producer surplus, implying a net welfare gain to the society. Similarly,

Karfakis, Velazco, Moreno, and Covarrubias (2011) attempted to identify the

impact of rice price changes on household welfare. They argued that rural

households exhibited higher welfare losses than urban households from an

increase in the rice price.

Based on the above situations, this study seeks to address the following

research question: how has agricultural trade liberalization influenced the welfare

(poverty reduction) of rural households in Bangladesh?

Methodology and Research Design

Data

The study used data from secondary sources to achieve its objectives. There

are requirements for data sets from at least two distinct time periods to measure

the impact of agricultural trade liberalization on the welfare of rural households.

The study used data on household income and consumption from two household

surveys of the Bangladesh Bureau of Statistics (BBS), including Household Income

and Expenditure Survey 2005 (HHIES; BBS, 2007) and Household Expenditure Surveys

1985–1986 (HHIES; BBS, 1988). It also used data from various statistical yearbooks

of Bangladesh.

The study encountered limitations in the use of secondary data due to a lack

of disaggregation. The aggregate data approach uses summaries and thus cuts

out much variation, resulting in higher correlations than with disaggregated data.

In HHIES 2005, all households were aggregated under 19 income or expenditure

groups. For the purpose of the analysis of inequality and poverty, this study

overcame this limitation by disaggregating household data into 100 observations

using respective household groups’ weight (percentage share) as the basis for

disaggregation. For instance, in HHIES 2005, households with income between

TK3000 and TK3999 represented 14.87 percent of the total households (BBS, 2007),

and they were disaggregated into 15 observations (households) having a similar

distance of income between two observations. This disaggregation is based on the

assumption that keeping the same average income distance between two

observations will not change the original characteristics of the data.

The study also conducted a data exploratory analysis to identify outliers. It

identified two outliers in the data set of HHES 1985–1986, and these outliers were


dropped from the data set. However, no outlier was found in the data set of

HHIES 2005.

Measurement of Poverty

The study measured poverty indices following approaches as used by

Haughton and Khandker (2009). These indices are illustrated below.

Headcount Index (P0).

P0 ¼Np

N; ð1Þ

where P0 is headcount index or poverty, Np is the number of poor, and N is the

total population. This equation can be rewritten as below:

P0 ¼ 1

N

XN

i¼1Iðyi < zÞ; ð2Þ

where z represents the poverty line; I(yi< z) is an indicator function that takes on

a value of 1 if the bracketed expression is true, and 0 otherwise; and yi is

consumption expenditure. The study used poverty lines (z) as used by the

Bangladesh Bureau of Statistics during HHES 1985–1986 and HHIES 2005. If

individual consumption (yi) is less than poverty line (z), then I(yi< z) is equal to 1

and the person would be counted as poor.

Poverty Gap Index (P1). The poverty gap index is measured as follows:

P1 ¼ 1

N

XN

i¼1

Gi

z; ð3Þ

where Gi is the poverty gap and can be measured as follows: Gi¼ (z� yi)� I(yi< z).

Squared Poverty Gap Index (P2). Similarly, the squared poverty gap index is

measured as follows:

P2 ¼ 1

N

XN

i¼1

Gi

z

� �2: ð4Þ

Sectoral Decomposition of Changes in Poverty. The study measured the sectoral

decomposition of changes in poverty by farm and non-farm households as

introduced by Ravallion and Huppi (1991) as follows:

Ptn � Pt0 ¼X

kðSt0kÞ Ptnk� Pt0kð Þ þ

XkðStnk� St0kÞðPt0kÞ

þX

kðStnk� St0kÞðPtnk� Pt0kÞ;

ð5Þ


where Ptn � Pt0 is change in poverty;P

kðSt0kÞðPtnk� Pt0kÞ is intra-sectoral

component;P

kðStnk� St0kÞðPt0kÞ is inter-sectoral (population shift) component;

andP

kðStnk� St0kÞðPtnk� Pt0kÞ is interaction component.

Growth Elasticity of Poverty. The study used the growth elasticity of poverty (e) asdefined by Bourguignon (2002, p. 8) and Haughton and Khandker (2009, p. 168).

It is measured as follows:

e ¼ @PY

@YP; ð6Þ

where P is the headcount index and Y is the per capita income or consumption.

Analytical Techniques

The literature review suggested that agricultural trade liberalization could

produce diverse welfare impacts across rural households. Some households might

have experienced benefits and others might have experienced losses. This is

because agricultural trade liberalization affects both goods and factor prices,

which in turn affect household welfare in different ways, depending on their

different characteristics and involvement with the goods and factor markets

(Nicita, 2009, p. 19).

Rural households were divided into five subgroups (quintiles) using income:

(i) Bottom 20 percent (Quintile 1),

(ii) Lower middle 20 percent (Quintile 2),

(iii) Middle 20 percent (Quintile 3),

(iv) Upper middle 20 percent (Quintile 4), and

(v) Top 20 percent (Quintile 5).

They were further classified on the basis of their involvement in farming

activities, namely,

(i) Farm households and

(ii) Non-farm households.

Other classifications included

(i) Farmers who owned farmland and

(ii) Agricultural laborers.

Farmers were further divided into three subgroups based on their farm size

(as used by the BBS during the Household Income and Expenditure Survey 2005

and Agricultural Sample Survey 2005):

(i) Small farmers (0.05–2.49 acres),

(ii) Medium farmers (2.50–7.49 acres), and

(iii) Large farmers (7.5 acres and above).


Finally, households were classified on the basis of their participation in the

rice market either as

(i) Net buyers or

(ii) Net sellers.

Results, Discussion, and Analysis

Inequality

The distribution of income scenario reveals the inequality over the entire

population of rural households. The Gini coefficient is the most widely used

single measure of inequality (Haughton & Khandker 2009, p. 104). It ranges from

zero (perfect equality) to one (perfect inequality). As shown in Table 1, the Gini

coefficient increased from 0.36 in 1985–1986 to 0.42 in 2005, implying increased

inequality in income distribution between the poorest and richest households

during this period. The consistent increase in the Gini coefficient over the course

of time suggests that the inequality in income distribution between the poor and

the rich gradually became greater during 1985–1986 to 2005. Thus, the Gini

coefficient increased by an average of 0.98 percent per year during that period.

Poverty in Rural Bangladesh

The conventional view of poverty is the pronounced deprivation in well-

being. It is measured by comparing individual or household income or consump-

tion with some defined threshold below which they are considered poor. In this

case, poverty is largely seen in monetary terms—and is the starting point for

most analyses of poverty. Sen (1987) argued that well-being would come from a

capability function in society. Thus, poverty arises when people lack key

capabilities, and so they have inadequate income or education, or poor health, or

insecurity, or low self-confidence, or a sense of powerlessness, or the absence of

rights such as freedom of speech (Haughton & Khandker, 2009, p. 3). This study

measured and considered poverty by comparing household consumption with

poverty lines defined and estimated by the Bangladesh Bureau of Statistics (BBS)

based on various household surveys.

Headcount Index of Poverty. Despite agricultural trade liberalization improving

productivity of rice and all groups of rural communities experiencing positive

Table 1. Gini Coefficients for Household Income Distribution: 1985–1986 to 2005

1985–1986 1991–1992 1995–1996 2000 2005 Average Change (%)

Gini coefficient 0.36 0.36 0.38 0.39 0.42 0.98

Source: Compiled and calculated from HHES 1985–1986 and HHIES 2005 of BBS.Note: Changes shown between years 1985–1986 and 2005.


growth in income over two decades—1985–1986 to 2005—the distribution of

income was uneven. Thus, the reduction in rural poverty was insignificant over

this period. Table 2 shows the headcount rate of poverty that provided the

pictures of rural poverty during 1985–1986 to 2005 in Bangladesh.

The headcount index is the most widely used measure of poverty. It

calculates the proportion of the population with a standard of living below

the poverty line that is counted as poor (Haughton & Khandker, 2009, p. 69;

Ravallion & Huppi, 1991, p. 60). The main strength of the headcount index is that

it is simple to construct and easy to understand (Haughton & Khandker, 2009,

p. 69). As estimated by the BBS in HHES 1985–1986 and HHIES 2005, this study

followed the same values of the upper and lower poverty lines to calculate the

headcount index of poverty of rural households. The lower poverty line

represents food and non-food consumption expenditure that is equal to food

expenditure (food poverty line) corresponding to minimal nutritional require-

ments, 2,122 kilocalories per capita per day. It corresponds to the extremely poor

households, whose total expenditure on food and non-food is equal to the food

poverty line. Therefore, the lower poverty line represents smaller food intake

than 2,122 kilocalories. On the other hand, the upper poverty line represents food

consumption expenditure with a value equal to the food poverty line plus a

typical non-food consumption expenditure, which is close to the food poverty

line (BBS, 2007, pp. 155, 156). Therefore, the upper poverty line corresponds to

the moderately poor households.

In 1985–1986, considering the upper poverty line, 65.5 percent of the

population lived in poverty (64.96 million); in 2005, this figure was 44.9 percent of

the total population (59.36 million). Considering the headcount rate of poverty

and the absolute number of poor population, a large number of the rural

population lived in poverty during this period, albeit decreasing by about

5 million between 1985–1986 and 2005.

Although the trend of poverty was declining, progress was slow, with a large

variation in poverty reduction across different groups of rural households. As

shown in Table 3, the reduction in poverty across different groups of rural

households was not even—some groups experienced a larger reduction rate than

others. Considering both the upper and lower poverty lines, non-farm households

experienced the largest reduction in poverty for the period 1985–1986 to 2005.

Farm households, on the other hand, experienced the lowest rate of poverty

reduction—far below that of non-farm households. This fact reinforced the

argument that non-farm households are net buyers of rice and they benefited

Table 2. Poverty in Rural Areas of Bangladesh: 1985–1986 to 2005

Poverty Lines

Headcount Index

1985–1986 1988–1989 1991–1992 1995–1996 2000 2005

Upper poverty line 65.2 62.5 58.7 54.5 52.3 44.9Lower poverty line 47.0 44.6 43.7 39.4 37.9 27.3

Source: Compiled from BBS for the respective years’ household surveys.


most from a decrease in the consumer price of rice as a result of agricultural trade

liberalization. In addition, agricultural trade liberalization facilitated growth in

the non-farm sector, with greater opportunities for employment and higher wages

that contributed to a larger reduction in poverty than that of the farm sector.

Although agricultural trade liberalization improved productivity of rice, farmers

experienced a large decrease in the producer price, thus reducing their welfare.

This fact is reflected again through the lower rate of poverty reduction in the

group of farm households than that of other groups of rural communities.

As revealed in the above analysis, the headcount index can explain only the

overall situation of poverty and cannot expound the intensity of poverty because

as a welfare function, it does not take into account the intensity of poverty. This

implies that the headcount index does not illustrate how poor the poor are; hence,

it does not change if people below the poverty line became poorer or improved

their poverty conditions in terms of relative intensity. Therefore, the poverty gap

index is required to analyze the intensity of poverty below the poverty lines.

Poverty Gap Index. The poverty gap index measures changes in the degree of

poverty among the poor. It explains the extent to which individuals, on average,

fall below the poverty line and expresses it as a percentage of the poverty line

(Haughton & Khandker, 2009, p. 70; Ravallion & Huppi, 1991, p. 61). It defines

the gap as the poverty line less the actual income of poor individuals. Thus,

the poverty gap is to be considered zero for non-poor individuals. It measures the

mean proportionate distance of the poverty gap in the population. This is a useful

measure to analyze the intensity of poverty. The larger the values of this index,

the more intense the poverty, because the average gap is greater between the

poverty line and actual income of the poor.

As shown in Table 4, considering both the upper and lower poverty lines, the

poverty gap index for non-farm households was much higher than that of farm

households—even higher than that of the rural household group as a whole in

1985–1986, suggesting poverty was more intense within the non-farm household

group than that of farm households. However, this index for non-farm households

Table 3. Change in Overall Poverty by Household Groups: 1985–1986 to 2005

Headcount Rate

1985–1986 2005 Total Change Average Change

Upper poverty lineRural household 65.2 44.9 �20.3 �0.97Non-farm household 80.1 48.8 �31.3 �1.49Farm household 58.8 43.2 �15.7 �0.75

Lower poverty lineRural household 47.0 27.3 �19.6 �0.93Non-farm household 68.5 21.4 �47.1 �2.24Farm household 37.9 29.9 �8.0 �0.38

Source: Author’s calculation using data from BBS HHES 1985–1986 and HHIES 2005.Note: Changes shown between years 1985–1986 and 2005.


became smaller than that of either farm or rural households, suggesting that the

non-farm households experienced a higher reduction in poverty and a lower

intensity in the average poverty gap in the post-liberalization period. They

experienced a greater reduction in poverty gap by �14.0 percent over that period,

indicating that the difference between poor households’ average consumption and

the poverty line decreased. Considering both the upper and lower poverty lines,

the poverty gap indices for all groups of rural households were lower in 2005

compared to their respective indices in 1985–1986. This is a clear indication that

the intensity of rural poverty became lower in the post-liberalization period,

suggesting that agricultural trade liberalization had a positive impact on lowering

average poverty gaps—the differences between poverty lines and average

consumption of the poor.

The poverty gap index is weight-neutral—giving the same weight irrespective

of the distance of household consumption from the poverty line. Thus, it cannot

measure the severity of poverty within a group of poor households, and so the

squared poverty gap index is analyzed below to address this issue.

Squared Poverty Gap Index. The squared poverty gap index is a measure of poverty

to compute and compare its severity. This is simply a weighted sum of poverty

gaps as a proportion of the poverty line, where the weights are the proportionate

poverty gaps themselves. Hence, by squaring the poverty gap index, it simply

puts more weight on observations that fall well below the poverty line (Haughton

& Khandker, 2009, p. 70; Ravallion & Huppi, 1991, p. 61). Like the poverty gap

index, the larger the value of the squared poverty gap index, the greater the

severity of poverty. As shown in Table 5, non-farm households experienced the

largest value of the squared poverty gap index considering both upper and lower

poverty lines, with 5.8 and 1.6 percent, respectively, in 1985–1986. However, they

experienced the least severity in poverty, with the lowest squared poverty gap

indices in 2005.

Considering three important measures of poverty (headcount rate, poverty

gap, and squared poverty gap index), the performance of non-farm households in

poverty reduction was much greater than that of farm households in the post-

liberalization period. This analysis has reinforced the argument that the non-farm

Table 4. Overall Poverty: Poverty Gap

1985–1986 2005 Change

Upper poverty lineRural household 14.7 6.9 �7.7Non-farm household 20.1 6.1 �14.0Farm household 12.4 7.3 �5.1

Lower poverty lineRural household 4.8 2.2 �2.5Non-farm household 7.9 1.8 �6.1Farm household 3.4 2.4 �1.0



households gained more from agricultural trade liberalization than farm house-

holds.

Poverty by Household Types. Although rural poverty decreased as per headcount

indices, the magnitude of change is not similar for all groups of rural households,

as shown in Table 6. By dividing rural households into two main groups—farm

and non-farm households—the proportional distribution of the poor population

suggests that farm households experienced an increase in the poor population by

3.7 percent, whereas non-farm households experienced a corresponding decrease

in the poor population by 3.7 percent. Among different groups of farm house-

holds, large and medium farmers did not have a poor population during 1985–

1986 to 2005, as they were considered rich households in the rural communities.

Considering both upper and lower poverty lines, small farmers experienced a

Table 5. Overall Poverty: Squared Poverty Gap (Percent)

1985–1986 2005 Change

Upper poverty lineRural household 3.8 1.6 �2.1Non-farm household 5.8 1.3 �4.4Farm household 2.9 1.8 �1.2

Lower poverty lineRural household 0.9 0.5 �0.4Non-farm household 1.6 0.4 �1.3Farm household 0.5 0.6 0.0


Table 6. Poverty by Household Types

Household Type

Poverty Headcount Rate (%) Distribution of the Poor (%)

1985–1986 2005 Change 1985–1986 2005 Change

Upper poverty lineRural household 65.2 44.9 �20.3 100.0 100.0 0.0Non-farm household 80.1 48.8 �31.3 36.5 32.8 �3.7Farm household 58.8 43.2 �15.7 63.5 67.2 3.7Large farmer 0.0 0.0 0.0 0.0 0.0 0.0Medium farmer 0.0 0.0 0.0 0.0 0.0 0.0Small farmer 54.5 41.1 �13.4 40.5 26.6 �13.8Agricultural laborer 100.0 69.2 �30.8 23.0 40.6 17.6

Lower poverty lineRural household 47.0 27.3 �19.6 100.0 100.0 0.0Non-farm household 68.5 21.4 �47.1 43.3 23.6 �19.8Farm household 37.9 29.9 �8.0 56.7 76.4 19.8Large farmer 0.0 0.0 0.0 0.0 0.0 0.0Medium farmer 0.0 0.0 0.0 0.0 0.0 0.0Small farmer 25.8 15.8 �10.0 26.6 16.8 �9.8Agricultural laborer 94.3 62.1 �32.2 30.1 59.7 29.6



lower reduction in poverty than the agricultural laborers during that period.

However, considering the upper poverty line, small farmers experienced an

actual reduction in their poor population by �13.8 percent; agricultural laborers

experienced an increase in their poor population by 17.6 percent over the same

period. Similarly, considering the lower poverty line, small farmers experienced a

reduction in poor population by �9.8 percent, but agricultural laborers experi-

enced an increase of 29.6 percent during that period. Therefore, among farm

households, the incidence of poverty increasingly fell on agricultural laborers,

thereby increasing their poor population from 23.0 percent in 1985–1986 to 40.6

percent in 2005 with the upper poverty line and from 30.1 percent in 1985–1986 to

59.7 percent in 2005 with the lower poverty line. This result suggests that

agricultural laborers experienced the largest increase in poor population in the

post-liberalization period.

The reasons might be because of (a) intergroup transfer from small farmers to

agricultural laborers through distress sales of land by poor small farmers due to

crop failures resulting from natural calamities such as floods, cyclones, and

droughts; and/or (b) demographic change, whereby the number of poor laborers

was swollen by young poor entering adulthood poor and moving into the

agricultural laborer group. A longitudinal study on the same households over a

long period (e.g., 10–20 years) is required to address this issue, which is beyond

the scope of this study.

Poverty by Involvement with the Rice Market. Considering household involvement

with the rice market, net sellers experienced an increase in poverty but net buyers

experienced a decrease in poverty during 1985–1986 to 2005, as shown in Table 7.

A large proportion of net sellers entered into poverty considering both upper and

lower poverty lines in 2005 compared to 1985–1986. On the other hand, net

buyers experienced a large reduction in poverty during 1985–1986 to 2005,

considering both upper and lower poverty lines. Therefore, during this period net

sellers experienced an increase in their poor population considering both upper

and lower poverty lines by 22.1 and 30.9 percent, respectively, whereas net

buyers experienced a decrease in theirs by exactly the same proportions. This

analysis has reinforced that net sellers did not gain as much as net buyers from

Table 7. Poverty by Net Seller and Net Buyer Households

Household Type

Poverty Headcount Rate (%) Distribution of the Poor

1985–1986 2005 Change 1985–1986 2005 Change

Upper poverty lineNet seller 10.2 36.4 26.2 27.2 49.3 22.1Net buyer 79.5 58.0 �21.5 72.8 50.7 �22.1

Lower poverty lineNet seller 9.0 24.3 15.3 23.1 54.0 30.9Net buyer 64.5 32.1 �32.4 76.9 46.0 �30.9



agricultural trade liberalization because a large proportion of their population

entered into poverty in the post-liberalization period. Net buyers, on the other

hand, gained more as they experienced a large reduction in poverty during the

same period. This result suggests that the reduction of the producer’s price of rice

was proportionately larger than the increase in productivity of rice in the post-

liberalization period; therefore, agricultural trade liberalization adversely affected

net sellers and positively affected net buyers.

Considering the upper poverty line, there was a large increase in the

proportion of poor net sellers from 27.2 percent in 1985–1986 to 49.3 percent in

2005. Similarly, considering the lower poverty line, the poor net seller population

increased from 23.1 percent in 1985–1986 to 54.0 percent in 2005. Considering

both the upper and lower poverty lines, the increase in the poor net seller

population was 22.1 and 23.1 percent, respectively, during 1985–1986 to 2005. On

the other hand, there was a similarly proportioned decrease in the poor net buyer

population during the same period, considering both upper and lower poverty

lines. Thus, a large proportion of poor net buyers became net sellers because of

the increase in productivity of rice, thereby raising the poor population of net

sellers during this period.

Growth Elasticity of Poverty. The growth elasticity of poverty indicates how

effectively economic growth has translated into poverty reduction. It is the

percentage change in poverty with respect to one percent change in per capita

welfare or growth (mean income or consumption per capita) and is used to

capture a variation in the sensitivity of poverty reduction to growth. It is a partial

measure to estimate the change in headcount poverty with one percent change in

growth holding inequality constant (Ravallion & Huppi, 1991, p. 64). The growth

elasticity of poverty is presented in Table 8. As expected, the signs of all elasticity

coefficients are negative. The negative signs of elasticity coefficients indicate an

inverse relationship between consumption and poverty—that is, an increase in

consumption will reduce poverty. The larger the value of the coefficient in

absolute terms, the greater the impact of consumption on poverty reduction. The

Table 8. Growth Elasticity of Poverty with Respect to Consumption

Elasticity of Poverty Coefficient

1985–1986 2005 Change

Upper poverty lineRural household �2.84 �4.80 �1.96Non-farm household �4.81 �8.71 �3.90Farm household �1.88 �2.82 �0.94

Lower poverty lineRural household �5.59 �8.09 �2.50Non-farm household �5.40 �8.65 �3.26Farm household �5.73 �7.91 �2.18



change components measure the magnitude of changes in elasticity coefficients.

Considering the upper poverty line, non-farm households had the largest

elasticity coefficient among rural households. On the other hand, farm households

had the lowest elasticity coefficient for both 1985–1986 and 2005. Similarly, non-

farm households had the largest elasticity coefficient in 2005 and marginally the

smallest elasticity coefficient in 1985–1986. This analysis suggests that an increase

in consumption by one percent would contribute to the largest reduction in

poverty for the non-farm households. Indeed, non-farm households experienced

the largest reduction in poverty during 1985–86 to 2005.

Elasticity coefficients of poverty with respect to inequality are presented in

Table 9. In this case, elasticity is measured considering inequality only and

growth is held constant. As expected, the signs of all elasticity coefficients are

positive, implying that the relationship between poverty and inequality is positive

or direct—an increase in inequality will result in an increase in poverty. The

elasticity of poverty coefficients for non-farm households were the lowest,

whereas for the farm households, these coefficients were the largest, considering

both upper and lower poverty lines in both 1985–1986 and 2005. This analysis

also suggests that non-farm households are likely to experience the lowest level

of increase in poverty and farm households are likely to experience the largest

increase in poverty as a result of a one percent increase in inequality. Conversely,

from a decrease in inequality by one percent, farm households will experience a

larger reduction in poverty than that of non-farm households.

Conclusion

The above findings and analyses suggest that the income distribution across

rural households was uneven in the post-liberalization period. Although agricul-

tural trade liberalization generated significant growth, inequality also increased

and the rich gained more from this growth than the poor. Therefore, poverty

reduction in the post-liberalization period was not as significant as the growth in

the economy. Among rural households, non-farm households gained more than

Table 9. Elasticity of Poverty with Respect to Inequality

Elasticity of Poverty Coefficient

1985–1986 2005 Change

Upper poverty lineRural household 2.14 4.72 2.58Non-farm household 1.95 3.07 2.12Farm household 2.91 5.79 2.88

Lower poverty lineRural household 3.87 8.09 4.22Non-farm household 1.21 4.73 3.52Farm household 4.12 8.39 4.27



farm households from post-liberalization growth because of a relatively large

reduction in consumer price compared to increases in productivity of rice.

Similarly, net buyer households gained more than net seller households because

of a large reduction in rice price in the post-liberalization era. The above findings

suggest that, holding inequality constant at the 1985–1986 level, rural poverty in

Bangladesh could be reduced to zero with the growth experienced during 1985–

1986 to 2005. However, the total reduction in poverty was insignificant during

this period because of a gradually higher increase in inequality, and the effects of

high economic growth resulting from agricultural trade liberalization were not

fully converted to poverty reduction. More than 40 percent of the population

lived in poverty in 2005. This analysis suggests that a reduction in poverty at a

substantial level is a big challenge for policymakers because of the increase in

inequality along with economic growth. Therefore, the government should

formulate policies to reduce inequality or to keep it constant along with high

economic growth in order to reduce poverty significantly. Policies to reduce

inequality could include a progressive income tax to impose higher tax on higher

income and income transfer to the poor.

The current liberal income tax system is not adequate to reduce inequality, as

it favors the rich (TK165000 or below: nil; TK165001–275000: 10 percent;

TK275001–325000: 15 percent; TK325001–375000: 20 percent; and TK375001þ: 25

percent income tax, whereas per capita income was only TK53000 in 2010–2011;

NBR, 2011, p. 1). Therefore, the government should also reform the income tax

structure, lowering the taxable income threshold to the level of per capita income,

increasing tax rates more progressively than existing levels, and raising the

highest tax rate to 40 percent of taxable income. Similarly, the government should

ensure efficient transfer of these benefits to the poor through subsidized food,

health care, and education to reduce inequality.

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